Plan to Let Judges Alter Loans Stalls

WASHINGTON -- Opposition from the banking industry and moderate senators of both parties has stalled a proposal to let judges modify mortgage terms in bankruptcy court.

The judicial maneuver, known as a "cramdown," is endorsed by President Barack Obama and the Democratic leadership as part of a sweeping plan to help strapped homeowners.

The cramdown issue has become a flash point for lawmakers who seek to aid homeowners -- in particular those who owe more than their house is worth -- and lawmakers who feel such aid penalizes people who have kept up with their debts.

With Congress due to start a two-week recess on April 6, Senate negotiators haven't been able to lure a handful of moderates to secure the 60 votes needed to clear a procedural hurdle and get the bill through the chamber.

"It looks very likely that we will not be able to take up this housing bill until next work period," said James Manley, spokesman for Senate Majority Leader Harry Reid (D., Nev.). "We will continue to work with Sen. [Dick] Durbin and Sen. [Christopher] Dodd to ensure we have the votes when we move this bill forward."

Financial institutions strongly oppose court-ordered mortgage workouts, which could entail easing homeowners' payment terms by lowering interest rates or the principal owed. They say this would increase risks for lenders, raise mortgage rates and clog courts. Mortgages have long been excluded from modification in personal-bankruptcy filings.

Mr. Obama endorsed the idea as part of his broader housing plan, which includes both sticks and carrots to persuade lenders to rework troubled mortgages. The carrots come in the form of payments to servicers for modifying loans. Cramdowns would be the stick -- a financial penalty if lenders don't deal with a mortgage before a client files a bankruptcy petition.

The House bill is already substantially weaker than one crafted by senators several weeks ago. It limits cramdowns to existing mortgages; loans made in the future wouldn't qualify.

This copy is for your personal, non-commercial use only. Distribution and use of this material are governed by our Subscriber Agreement and by copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit www.djreprints.com.